Spanish and European markets reacted negatively Monday to the news of a heavy defeat for the ruling Socialist party in local and regional elections
Spanish and European markets reacted negatively Monday to the news of a heavy defeat for the ruling Socialist party in local and regional elections Sunday, amid growing calls for a general election later this year.
Spain's stock market was Europe's top loser in early trade, and at 1122 GMT was down 1.4%.
At the same time, the spread between Spanish and German 10-year bonds, a key measure of risk, was 14 basis points higher at 257 basis points, up 20% from last week--despite being relatively narrower compared with the spreads for Portugal and Greece.
The Socialists' debacle, which makes Spain's political landscape less certain, also contributed to pushing the euro lower Monday.
Other news weighing on the euro included Standard & Poor's outlook downgrade on Italian government debt and Fitch's downgrade of Greek debt by three notches Friday.
In a note to investors, Nomura analysts said Spain's political situation is a critical issue for the European Union as a whole, as the EU's capacity to deal with severe political and financial stress in the euro zone's fourth-largest economy is in question.
Meanwhile, Bank of Spain Governor Miguel Angel Fernandez Ordonez said Monday that the country's government must now push forward with economic reforms to lower its unsustainably high borrowing costs. He added that a 200 basis point spread with German bonds is not sustainable, and called on the government to follow through with its deficit-cutting commitments and address the country's soaring unemployment rate.
Prime Minister Jose Luis Rodriguez Zapatero, who has come under fire as he has moved to cut the budget deficit in recent months after years of higher spending, late Sunday ruled out calling elections before his term expires in early 2012.
However, calls for early elections persisted Monday, with several national newspapers making such demands.
The polls were marked by discontent with the country's dire economic situation and unemployment at 21.3% of the workforce. This boiled over into nationwide protests, and hundreds remained camped in Madrid's Puerta del Sol square early Monday after the number of protesters rose to tens of thousands across the country over the weekend.
With all votes tallied, the opposition Popular Party, or PP, led by Mariano Rajoy, won 37.5% of the municipal vote across the country, nearly 10 percentage points more than the Socialists. That is the largest difference between the two parties since the local elections of 1991.
But it was Bildu--a Basque independence coalition including former members of the political wing of terrorist group ETA--that posted the most surprising results in the election, becoming the second-largest group by votes in the Basque Country.
Bildu was close to being banned from the election, an issue that caused friction between Zapatero's Socialists and their Basque nationalist allies PNV, which in the event got the most votes in the region.
PP spokeswoman Ana Mato said Monday the party has been calling for an early general election for some time, and still believes that Zapatero--who has already said he won't stand for reelection--should step down, the sooner the better.
"Yesterday it wasn't us who called for an early general election, it was the Spanish people," Mato said.
The ruling Socialists also lost control of key regional governments, including those of Balearic Islands and Castilla La Mancha, a significant development as economists say a change of power there may lead to the disclosure of higher budget deficits than previously reported.
This might have an effect on the central government's effort to cut Spain's overall budget deficit to 6% of gross domestic product this year, from just over 9% of GDP last year.
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